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Deputy Commissioner of Taxation v Falzon

[2008] QCA 327

DEPUTY COMMISSIONER OF TAXATION(plaintiff/respondent)vEDWARD GEORGE FALZON(defendant/applicant)

FILE NO/S:

Appeal No 3677 of 2008DC No 1192 of 2005

DIVISION:

Court of Appeal

PROCEEDING:

Application for Extension of Time s 118 DCA (Civil)

ORIGINATING COURT:

District Court at Brisbane

DELIVERED ON:

17 October 2008

DELIVERED AT:

Brisbane

HEARING DATE:

25 August 2008

JUDGES:

McMurdo P, Fraser JA and Philippides JSeparate reasons for judgment of each member of the Court, each concurring as to the orders made

ORDERS:

Grant the application for an extension of time within which to apply for leave to appeal limited to the grounds described in Order 2.

Grant leave to appeal limited to the grounds identified in the applicant’s draft notice of appeal as ground 1 (that the primary judge erred in law in not providing adequate reasons) and ground 6(b) (that the primary judge erred in law in not determining that the Director Penalty Notice issued to the applicant on 12 March 2003 was invalid or at least arguably so).

Dismiss the appeal.

The applicant pay the respondent's costs of the applications and the appeal, to be assessed on the standard basis.

CATCHWORDS:

TAXES AND DUTIES – INCOME TAX AND RELATED LEGISLATION – COLLECTION AND RECOVERY OF TAX – PROCEEDINGS FOR RECOVERY – SUMMARY JUDGMENT – where the applicant appealed from a decision of a District Court judge who was not persuaded to set aside summary judgement entered in favour of the respondent against the applicant

APPEAL AND NEW TRIAL – APPEAL – PRACTICE AND PROCEDURE – QUEENSLAND – WHEN APPEAL LIES – BY LEAVE OF COURT – GENERALLY – where the applicant advanced many arguments about the issues relevant to his application for an extension of time within which to seek leave to appeal – whether the application for an extension of time within which to seek leave to appeal should be granted – whether leave to appeal pursuant to s 118 of the District Court of Queensland Act 1967 (Qld) should be granted

TAXES AND DUTIES – INCOME TAX AND RELATED LEGISLATION – COLLECTION AND RECOVERY OF TAX – IN GENERAL – where as the director of a company the applicant was liable to pay to the Commissioner by way of penalty an amount equal to the unpaid amount of each liability of the company – where the respondent issued the applicant with Director Penalty Notices advising the applicant of the penalty amounts – where the respondent contended that the Director Penalty Notices were invalid as they incorrectly stated the amounts owed – whether the Director Penalty Notices were invalid – consideration of the decision in Deputy Commissioner of Taxation v Gruber

McMURDO P: The applications for an extension of time and for leave to appeal should be conditionally granted but the appeal dismissed with costs. I agree with Fraser JA's reasons and proposed orders.

FRASER JA: The applicant failed to persuade a District Court judge to set aside the summary judgment entered in favour of the respondent against the applicant. The applicant, who represented himself, advanced many arguments about the issues relevant to his application for an extension of time within which to seek leave to appeal from that decision, but in my view there are two critical questions. The first is whether or not the applicant has an arguable defence that the company of which he was a director had paid the amounts claimed against him pursuant to s 222ANA of the Income Tax Assessment Act 1936 (Cth) (“ITAA”). The second is whether a misstatement of the amount of an asserted unpaid liability in a director’s penalty notice under s 222AOE of ITAA invalidates the notice in relation to other, correctly stated unpaid liabilities.

I will first describe the unfortunate procedural history of the litigation before turning to consider those and the subsidiary issues arising in the applications before this Court.

On 30 October 2007 the District Court dismissed the applicant's application filed on 25 January 2007 to set aside a summary judgment in favour of the respondent that had been entered on 6October 2006 in the absence of the applicant. The evidence before the primary judge established that although the applicant had been duly served with the respondent’s application that application had not come to the applicant’s notice. The primary judge concluded that if the applicant demonstrated that he had a defence on the merits there would be good reason to set aside the summary judgment despite the applicant's delay in applying for that relief and his "miscalculations in looking after his own interests at the time". That approach was consistent with authority to the effect that the question whether an applicant has a prima facie case on the merits is usually treated as the most cogent of the discretionary considerations in such a case.[1]

The primary judge concluded, however, that the applicant had not demonstrated an arguable defence and dismissed the applicant’s application for that reason.

On 23 April 2008 the applicant applied in this Court for an extension of time within which to apply for leave to appeal from the primary judge’s decision. The Court heard full argument on that application, the proposed application for leave to appeal and the proposed appeal.

The factors that are relevant to the application for an extension of time for leave to appeal include the adequacy of the applicant’s explanation for his delay in applying, whether the respondent is prejudiced by the delay and the merits of the proposed application. [2]

Explanation for the applicant’s delay

The application is very late: it is nearly five monthsout of time. The applicant seeks to explain some of his delay by his evidence that although he ordered a copy of the judgment on 5 November 2007 it did not arrive until 29 November 2007. That explanation is unsatisfactory. The applicant was present when the judgement was delivered on 30 October 2007. His affidavit does not assert that he did not then make a sufficiently comprehensive note of the judgment to enable him to file an application for leave to appeal on the grounds he now invokes. The applicant has no explanation for his delay from 29 November 2007 until mid-January 2008, the latter being the date from which he contends he was unable to fund the commencement of an appeal. (His statement that by the time the copy of the transcript arrived he was in Sydney is no explanation for his delay, as the applicant seemed to recognise in his oral submissions.) That financial difficulty seems to have been short lived because the applicant swears that he settled his indebtedness to his solicitors on 23 January 2008. The delay after that period is attributed to a "communication break down" between the applicant and his solicitors, but the applicant’s affidavit provided no detail about that nor when it was resolved.

In short the applicant's explanation for this lengthy delay is quite unsatisfactory. The significance to be attributed to that factor must be considered though in the context of the other relevant matters. Of particular importance are the applicant’s contentions that his proposed application and appeal are meritorious on various grounds, including that the reasons of the primary judge were inadequate.

Merits of the proposed application for leave to appeal and the proposed appeal

Leave to appeal under s 118(3) of the District Court of Queensland Act 1967 (Qld) is usually granted only when an appeal is necessary to correct a substantial injustice and there is a reasonable argument that there is an error to be corrected.[3] The refusal of the applicant's application to set aside the summary judgment practically affected the applicant's substantive rights. Therefore, whether there is merit in the proposed application for leave to appeal turns in large part upon the question whether the applicant had a good arguable defence to the respondent’s claim. It is therefore necessary to consider the merits of the suggested defences.

The claim against the applicant and his defences

The respondent’s claim comprised two separate components. First, the respondent claimed $1,540 as penalties (and interest) pursuant to s 286-75 of the Taxation Administration Act 1953 ("TAA") for the applicant's failure to give to the Commissioner income tax returns by the dates upon which they were due for the years ended 30 June in each of 2002, 2003 and 2004.

The defence pleaded to that claim was that the applicant had not received a notice that was a condition precedent for the respondent's statutory claim. However, the respondent established by an affidavit that the notice had been served in the way required by the legislation. The applicant did not contend to the contrary in the District Court or in this Court. Accordingly there was no merit in the applicant’s defence to this part of the claim.

The larger component of the respondent's claim was for $62,147.76 by way of penalties owing by the applicant as a director of a company called “Performing PC's Pty Ltd” pursuant to s 222AOC of ITAA. The respondent claimed that the applicant was liable under ITAA for PAYG tax withheld by the company from its employees’ salaries and wages in 2001 and 2002 for which no corresponding amount had been remitted to the Commissioner.

Section 222AOB of ITAA obliges a director to cause the company to pay each such amount to the Commissioner, to enter a payment agreement with the Commissioner under s 222ALA, or to appoint an administrator or to begin the winding up of a company. Section 222AOC imposes a penalty, equal to the tax withheld, upon a person who is a director during the period from the date the money is withheld and the due date for its payment. The applicant was such a person.

Section 222AOE provides that the Commissioner is not entitled to recover the penalty from the director unless the Commissioner has given the director a notice setting out the amount of the unpaid liability under s 222AOC and stating that the director must pay the penalty unless, within 14 days, the liability has been discharged, the company has entered into a s 222ALA agreement, an administrator has been appointed or the company is being wound up. The applicant argued that the notices the Commissioner had given were invalid because of misstatements in them.

There were two relevant notices. The first (“DPN1”) was dated 7 March 2002 and the second (“(DPN2”) was dated 12 March 2003. It is sufficient here to set out the tables in them which identified the amounts for which the applicant was alleged to be liable.

[1][4] 1 July 2000 to 30 September 200013,505.00 529.00[2] 1 October 2000 to 31 December 2000 9,700.00 9,700.00[3] 1 January 2001 to 31 March 200127,365.0027,365.00[4] 1 April 2001 to 30 June 200116,404.0016,404.00[5] 1 July 2001 to 30 September 200113,890.0013,890.00

$$[1] 1 October 2001 to 31 December 200119,166.00 5,491.40[2] 1 January 2002 to 31 March 200220,504.00 20,504.00[3] 1 July 2002 to 30 September 200228,650.00 28,650.00[4] 1 October 2002 to 31 December 200226,756.00 26,756.00"

Taking into account payments by the company, the amended statement of claim made no claim for items 1-3 or 5 in DPN1 and items 1 and 2 in DPN2, and the respondent allowed a credit against item 4 in DPN1 of $9,662.24, reducing the claim for that item from $16,404.00 to $6,741.76. The resulting claim made in the respondent’s amended statement of claim may be summarised as follows:

The Amount Withheld

Period of Withholding

(The first deduction day was a day falling within this period)

Due Date

Amount Withheld

First

1 April 2001 to 30 June 2001

13 August 2001

6,741.76

Second

1 July 2002 to 30 September 2002

28 October 2002

28,650.00

Third

1 October 2002 to 31 December 2002

28 February 2003

26,756.00

Total

62,147.76

The applicant's defence pleaded that payments made to the respondent to reduce any amount owed by the company since January 2003 exceeded $80,000 and that should therefore have reduced any personal liability of the applicant to nil. However, the applicant did not dispute the respondent’s evidence that the company owed other tax debts in an amount sufficient to absorb all of those payments. In the respondent’s reply, the respondent admitted that in excess of $80,000 in payments had been received from or on behalf of the company, but denied the allegation that the payments reduced the applicant's personal liabilities.

It follows that the issue on the pleadings was whether or not the respondent had validly allocated the company’s payments to its debts other than its outstanding debts described in DPN1 and DPN2. In addition, in the application to set aside the summary judgment the applicant relied upon some other matters as arguable defences though they had not been pleaded in his defence. The respondent did not argue that the applicant could not rely upon those unpleaded points. In all, the applicant advanced six principal contentions before the primary judge, which he repeated in this Court, in support of his argument that he had a good defence on the merits sufficient to warrant setting aside the summary judgment. As will appear, the contention which I consider to raise the most substantial question was that the notice DPN2 was wholly invalid because it misstated the amount of the liability for items 1 and 2.

Reasons of the primary judge

The judge referred to the large amount of affidavit evidence and the extensive submissions, which his Honour had carefully considered, and said:

“So the issue is, have the director penalty notices relied upon in a statement of claim been paid by Mr Falzon or not.

He, as a director of company did pay considerable amounts of money in the company name and his misfortune was that he did not send a note to the Deputy Commissioner saying that it was to be allocated directly as a payment against the director’s penalty notice. Therefore, in many cases, it was appropriated to the company’s debts according to the fixed policies of the Australian Tax Office.

There is a large amount of affidavit evidence here and counsel submissions and Mr Falzon’s submissions. I am able to say that I have spent quite a considerable time in going through the affidavits, the submissions, to see whether or not Mr Falzon’s assertions may be correct.

In short, I have found it impossible to find any evidence that the director penalty notices have been paid as he says. Overall, the matter can be looked at by seeing that the total payments made to the Tax Office are less than the outstanding amounts payable by him or the company and it seems the obvious final conclusion is that the gap is represented by these unpaid director penalty notices. They, in fact, are the cause of the deficiency.

I am conscious of his arguments that the payments were wrongly appropriated by the Australian Tax Office and that he personally should be given credits, even if the company’s liabilities are not totally paid. However, I have looked, with care I hasten to say, at the extensive submissions on behalf of the Deputy Commissioner and I can find no fault in the submissions about that.

My conclusion is that the director penalty notices have not been paid and, therefore, there is no triable issue about them. It follows that there is no real prospect of success if the matter were to go any further, so, it should be brought to an end now."

The primary judge there observed that the issue was whether the director penalty notices relied upon in a statement of claim (DPN1 and DPN2) had been paid by the company or not. It was that issue which was then dealt with in the reasons, in which the judge concluded that there was no evidence that the notices had been paid as the applicant contended. In the course of considering that question the judge also rejected the contention that the applicant's payments had been wrongly appropriated by the Commissioner.

The judge did not, however, give any reasons for rejecting the applicant’s argument that the notices DPN1 and DPN2 were invalid. There is, in my respectful opinion, substance in the applicant's complaint that the reasons were inadequate because they did not grapple with that argument. It was developed in his written submissions, and the applicant’s proposition that the respondent’s admission of an error in one item in DPN2 invalidated it for all purposes was arguably supported by the decision of the New South Wales Court of Appeal in Commissioner of Taxation v Gruber[5]. That decision was particularly relied upon in the applicant’s written submissions in the District Court, but it was not mentioned in the judge's reasons.

Elsewhere in the reasons the judge referred to the fact that here had been more than one hearing and that the matter had proceeded in a somewhat disjointed way. That suggests the possibility that omissions from the reasons are explicable by, for example, concessions made by or on the applicant's behalf in the course of argument. However the Court does not have the transcripts of the various hearings in which this application was considered and the respondent’s counsel did not contend that reference to them would assist the respondent. We must proceed on the assumption that the reasons described above constitute a complete statement of the judge’s reasons for dismissing the application.

The reasons given for interlocutory orders, particularly those concerning matters of practice and procedure, may be much less extensive and detailed than the reasons for granting or withholding final relief after a trial. In this case, however, where the judge concluded that the summary judgment should be set aside if the applicant demonstrated a defence on the merits, the judge’s conclusion that there was no such defence practically deprived the applicant of the opportunity to contest his liability at a trial. In those circumstances there was more than an exiguous duty on the primary judge to give reasons for that conclusion.[6]

In my respectful opinion, the reasons were inadequate in relation to the issue concerning the invalidity of the notices upon which the applicant’s liability depended. That favours granting the extension of time and giving leave to appeal in relation to that ground. [7]

I turn then to consider the six principal contentions advanced by the applicant as defences to the respondent’s claim, the merits of which are also relevant to the question whether the Court should accede to the applications.

First contention: the respondent's evidence was insufficient to support the summary judgment

The respondent's evidence in support of its summary judgment application included a duly executed certificate that $64,008.06 was due at the date of that certificate (19September 2006). Under s 8AAZJ of TAA that certificate was prima facie evidence of the amount of the debt. Similarly, the respondent's averments in the amended statement of claim of the material facts giving rise to the debt constituted prima facie evidence of those facts, under s 255-50 of Schedule 1 to TAA. The applicant having not appeared after he was duly served and there being no contradictory evidence, the judge was entitled to enter summary judgment on that evidence.

The applicant did not challenge that evidence. His argument was that the supporting affidavit did not exhibit a statement of the applicant’s account that was given any statutory effect as evidence. It is not necessary to consider that argument. Even if it were accepted it would not deprive the evidence to which I have referred of its effect as sufficient proof of the claim. There is nothing in this point.

Second contention: applicant’s payment of the debts in DPN1 and respondent’s ineffective reallocation of payments

The applicant's second defence was that the respondent had treated the liability recorded on DPN1 as having been paid in full and was not entitled to "reactivate" it by subsequent transfers or reallocations of the company’s payments.

The evidence does not support the applicant’s argument. The applicant swore that when the company made the payments to the respondent he did not advise the respondent that those payments were in respect of the PAYG amounts in the DPNs and he gave no instruction in that respect. In those circumstances, apart from any effect of the applicable statutory provisions (which I mention below), the respondent would have been entitled thereafter to appropriate those payments to any outstanding debt of the company.[8]

An affidavit filed on behalf of the respondent explained that payments received from the company without any instruction as to their appropriation were allocated to the earliest debt on the company's “running balance account” (“RBA”),[9] that being in accordance with the published "Receivables Policy" at the time the payments were made. The applicant relied upon a statement in clause 7.7.13 of that policy that "where payment is received (in full or in part) in relation to a DPN this amount must be allocated to reduce the penalty on the director's account and the corresponding parallel liability on the company account (e.g. the relevant PAYG withholding amounts)." However, the paragraph then continues:

"Given personalised payment advice forms are not supplied for a DPN, the director must advise the tax office that the respected payment is in relation to the DPN."

As I have mentioned, the applicant did not give that advice. In any event, the policy did not create any enforceable rights.[10]

Division 3 of Part 11B of TAA sets out how the Commissioner must treat various kinds of amounts, including a payment the Commissioner receives in respect of a tax debt of an entity. It provides that the Commissioner must use one of two, alternative methods. The relevant method here was method 1. In that respect s8AAZLA provided, so far as is relevant:

"8AAZLA Method 1 – allocating the amount first to an RBA

(1)The Commissioner may, in the manner he or she determines, allocate the amount to an RBA of the entity or, if the entity is a member of an RBA group, to an RBA of another member of the group.

(2)The Commissioner must then also apply the amount against the following kinds of debts (if there are any):

(a)tax debts that have been allocated to that RBA;

(b)general interest charge on such tax debts."

Section 8AAZLE provided:

"8AAZLEInstructions to Commissioner not binding

In doing anything under this Division, the Commissioner is not required to take account of any instructions of any entity."

The term in s 8AAZLA "RBA" means a "running balance account established under s 8AAZC".[11]

The respondent’s evidence included a statement (exhibit “RD1”) that was sworn to be the relevant RBA established for the company. On its face exhibit "RD1" was consistent with allocations under those statutory provisions which accorded with the respondent’s claims.

The applicant argues that a statement for the company dated 31 January 2005 (exhibit “C” to the applicant’s affidavit) evidences different allocations. He contends that the company received similar monthly statements which recorded transactions for the previous month, but his affidavit did not exhibit any of those statements or describe their contents. The statement exhibit "C" is entitled “Interim” and “Integrated client account – running balance account (RBA) statement”. The applicant identified 20 separate payments which, he deposed, extinguished the several liabilities shown on DPN1 and DPN2 in respect of which judgment was later given against him (that is, for part of item 4 on DPN1 and for items 3 and 4 on DPN2).

However the evidence does not support the applicant's critical contentions that exhibit "C" was a RBA and thus bound the respondent to allocations in it. According to the respondent’s evidence, which was not contradicted by any evidence or challenged in cross-examination, the RBA for the company was the different exhibit (“RD1”), to which I earlier referred. It is therefore not easy to see how the document now relied upon by the applicant supports his argument.

Further, the applicant’s defence on this topic sworn to in his affidavit is based upon his reconstruction of the statement exhibit "C" on the premise that the payments should have been appropriated to the amounts claimed in the DPNs in priority to the payment of the company’s other liabilities. The statutory provisions set out above demonstrate that the Commissioner was under no such obligation.

Further, the statement (exhibit “C”) identifies debits not only in respect of the withheld PAYG (the subject of the DPNs) but also for payments and transfers out of the account in respect of the company’s other liabilities (GST, PAYE, and interest charges). The applicant contended that some of the transfers out for PAYE were made after payments had been allocated to withheld PAYG and thus were not effective to undo the effect of the initial allocations to the withheld PAYG; but the evidence did not show that any such allocation to withheld PAYG had been communicated to him in a monthly statement at any time before the application of the money to the company’s PAYE debts. And the payments relied upon by the applicant are not described in exhibit "C" in terms which suggest, as the applicant contended in this argument, that the respondent had applied them to the company’s liability for PAYG: rather, the description in each case is simply “Payment received”. The applicant's argument did not explain why the Commissioner could not later apply such payments to PAYE debts in the way shown on this statement.

Finally, I would add that, perhaps because of the difficulty the applicant understandably faced in articulating this argument, it is not at all clear to me that even if the statement exhibit 'C" were construed as the applicant would contend it is in any way inconsistent with the respondent’s claim.

In my opinion the applicant did not identify an arguable defence on the merits under this heading.

Third contention: the Commissioner was only empowered to make one allocation

In a similar argument, the applicant relied upon another document to contend that the Commissioner had allocated payments made by the company to the reduction of the PAYG tax withheld and was not entitled thereafter to reallocate those payments.

The document upon which this contention primarily relies (exhibit “RD2”) is a statement produced by the Australian Taxation Office dated 8 March 2007, headed “Interim” and described as “Director penalty record –running balance account (RBA) statement".

The applicant relies upon numerous entries in “RD2”, but his point can be illustrated by reference to two of them. On page 3 the statement shows a balance of “0.00” at an “effective date” of 24 April 2002 and a “process date” of 13 March 2003, after a credit entry in the same line of $1,109 for “Payment/credit applied to director penalty parallel liability for pay as you go tax withheld.” On page 8 the statement shows a balance of “$72,388.68” at the same effective date of 24 April 2002 but at a later “processing date” of 23 June 2004, after a debit entry on the same line of $1,109 for “Payment/credit applied to director penalty parallel liability for pay as you go tax withheld –Cancellation”. Between pages 3 and 8 there were similar cancellations and credits that explain the amount of the increase in the balance owing by the applicant. There were also similar changes in “effective date” payments or credits by cancellations recorded on later processing dates later in the statement. The closing balance, as at 8 March 2007, was the amount of the claim for which judgment was given, namely $62,147.76.

The applicant does not dispute that when the company made the relevant payments it owed other tax debts in an amount sufficient to absorb those payments in the manner in which they ultimately were applied in the statement. He argues, however, that the respondent was bound by the initial allocations of those payments shown on “RD 2” which purportedly extinguished the company debts for which he was personally liable. For example, the applicant would contend that his liability for the $16,404.00 in item 4 of DPN1 (the notice issue on 7 March 2002) is shown to have been discharged as at 24 April 2002 by the processing of credits including that of $1,109 shown on “RD2” to have been processed on 13 March 2003. He argues that the Commissioner was not entitled subsequently to reallocate the company’s payments to its other tax debts, as “RD2”suggests was purportedly done, with the result of “reinstating” the applicant’s discharged liability.

However, exhibit “RD2” is not the company’s RBA. It is a statement produced for the respondent’s use in the litigation. Although its description includes “Director penalty record–running balance account (RBA) statement", it is also headed “Interim”, it is dated 8 March 2007, and it was communicated to the applicant for the first time on that date, when it was exhibited to one of the respondent’s affidavit of the same date.

I accept the respondent’s contention that the earlier entries in exhibit “RD2” upon which the applicant relies simply recorded entries made by process operators and that there was no reason why such records could not subsequently be corrected, as they were, before the statement was communicated to the applicant.

The applicant argued that the summary judgment should not have included interest under s 47 of the Supreme Court Act 1995 because of delay by the respondent in prosecuting its claim. The award of interest was within the discretion of the judge who entered the summary judgment. In the applicant’s oral submissions he disavowed any contention that there was any error in the exercise of that discretion. He argued that had he been present at the summary judgement hearing he might have persuaded the judge to decrease the amount of interest or award none at all. The applicant sought a fresh opportunity to persuade a judge to exercise the discretion more favourably to him.

This is not a strong argument, given that the Commissioner was held out of the money whilst the applicant was able to benefit from possession of it.[12] Having regard also to the applicant’s unsatisfactorily explained delays, in my opinion it would not be a proper exercise of discretion to extend time or to grant leave to appeal merely to permit the applicant to seek to challenge the regularly entered judgement on this basis.

Fifth contention: the applicant's continuing right of appropriation

The applicant contended that, although the company had not instructed the Commissioner to apply its payments in reduction of the PAYG withheld (and thus in reduction of the DPN liabilities) the applicant thereafter retained that right even after appropriation by the respondent. No such right exists at common law, which requires any appropriation by the debtor to be made at the time of payment, in default of which the right of appropriation devolves of the creditor. In any event the contention is irreconcilable with s 8AAZLE of TAA, set out above.

Sixth contention: invalidity of the director penalty notices

The applicant contended that the DPNs were invalid because they misstated the company’s liabilities.

The Commissioner is not entitled to recover from a person a penalty payable under this Subdivision until the end of 14 days after the Commissioner gives to the person a notice that:

(a)sets out details of the unpaid amount of the liability referred to in subsection 222AOC(1), (1A) or (2) (whichever relates to the penalty); and

(b)states that the person is liable to pay to the Commissioner, by way of penalty, an amount equal to that unpaid amount, but that the penalty will be remitted if, at the end of 14 days after the notice is given:

(i)the liability has been discharged; or

(ii)an agreement relating to the liability is in force under section 222ALA; or

(iii)the company is under administration within the meaning of the Corporations Act 2001; or

(iv)the company is being wound up."

It is convenient now to reproduce the whole of the first notice, DPN1, which was dated 7 March 2002:

"Section 222AOE

Income Tax Assessment Act 1936

NOTICE OF DIRECTOR'S LIABILITY TO PAY A PENALTYTO THE COMMISSIONER OF TAXATIONAMOUNTS WITHHELD

TO:Edward George Falzon21 Wilton CrescentBORONIA HEIGHTS QLD 4124

In exercise of the powers and functions conferred on me as a Deputy Commissioner of Taxation by a delegation from the Commissioner of Taxation under the provisions of the Taxation Administration Act 1953("the TAA53"), I give you notice under section 222AOE of the Income Tax Assessment Act 1936("the ITAA36") that you, as a director of the company, are liable to pay the Commissioner by way of penalty an amount equal to the unpaid amount of each liability of PERFORMING PC’S PTY LTD, ACN 072 610 096,("the company") pursuant to subsection l6-70(1) in Schedule 1 to the TAA53 in respect of amounts withheld by the company for the purposes of Division 12 in Schedule 1 to the TAA53, details of which are set out in the following table:-

$$1 July 2000 to 30 September 200013,505.00 529.001 October 2000 to 31 December 2000 9,700.00 9,700.001 January 2001 to 31 March 200127,365.0027,365.001 April 2001 to 30 June 200116,404.0016,404.001 July 2001 to 30 September 200113,890.0013,890.00

The penalty in respect of each unpaid amount of the company’s liability will be remitted if, at the end of 14 daysafter this notice is given to you:-

(a)the company’s liability in respect of that unpaid amount has been discharged; or

(b)an agreement relating to the liability is in force under section 222ALA of the ITAA36; or

(c)the company is under administration within the meaning of the Corporations Act 2001; or

(d)the company is being wound up.

Dated this Seventh day of March 2002.

ERIN HOLLANDDEPUTY COMMISSIONER OF TAXATION ANDDELEGATE OF THE COMMISSIONER OF TAXATION"

As I mentioned earlier, the respondent obtained judgment against the applicant only for $6,741.76 as the balance owing for the $16,404 in the fourth item in DPN1 after a payment was brought to account. The applicant does not contend that the amount for that item was misstated when the notice issued. Rather, he contends for a misstatement in the amount for item 1, for which the respondent made no claim.

The applicant contends that DPN1 was invalid because the unpaid balance of item 1 was not $529 but $12,670. Reading the RBA (ex “RD1”) and DPN1 together, it is however clear that the $529 is the balance owing after deduction of two payments, $835 made on 30 November 2000 and $12,141 made on 28 October 2001. An affidavit by a tax officer demonstrated (with reference to exhibit “RD4”) that it was only after the issue of DPN1 that the Commissioner purported to reallocate the second payment to item 5 on DPN1.

The tax officer (who was not contradicted or cross-examined) explained that on 24 April 2002 (that is, after DPN 1 had issued on 7 March 2002), the company paid $1,749. Because the total of that payment and the $12,141 equalled the amount of item 5 on DPN1 ($13,890), it was thought that the company must have intended to appropriate the $12,141 to item 5 rather than to item 1. For that reason the payment was reallocated to item 5.

A purported reallocation after the date of the notice could not have the effect of retrospectively invalidating the notice. For this reason I reject the applicant's sixth contention as far as it relates to DPN1.

The second notice (DPN2) was dated 12 March 2003. It was in the same form as the first notice (DPN1) (save for the table of amounts which is set out earlier in these reasons).

The respondent's claim against the applicant included only the last two amounts in that table, items 3 and 4. The respondent's own analysis suggests that by 26 April 2002, that is to say nearly a year before the issue of the notice, the respondent may have applied payments received from the company in full satisfaction of items 1 and 2. That appears not just from an examination of the ATO's internal accounts, but from an affidavit of an officer employed in the ATO. She compiled a table that "shows the allocation of those payments".

The respondent therefore conceded in the District Court that the parts of the notice DPN2 dealing with item 1 (for the period 1 October 2001 to 31 December 2001) were “invalid". The applicant argued, but the respondent disputed, that the same was true for the period 1 January 2002 to 31 March 2002. It is not necessary to resolve that issue because the respondent conceded that for present purposes the validity of the notice in relation to items 3 and 4 (for which the respondent obtained judgment) should be assessed on the premise that the applicant might establish the substantial error he asserted in both of items 1 and 2 (for which no claim was pursued). The question is whether, despite the error, the notice DPN2 should still be treated as a notice that fulfils the requirements of s 222AOE in relation to items 3 and 4.

The applicant contends that invalidity of the notice on that account necessarily follows from the New South Wales Court of Appeal's decision in Deputy Commissioner of Taxation v Gruber[13]. If Gruber did decide the point, then we should follow it unless convinced that it is plainly wrong.[14] It is therefore necessary to identify precisely what was decided in Gruber that is relevant in this application.

One of the two notices considered in Gruber was held to be invalid for two reasons. One ground of invalidity was that the notice did not include reference to the "due date" upon which the company was obliged to remit to the Commissioner an amount equal to the deduction made from its employee's wages; but in so far as Gruber held that a notice under s 22AOE was required to set out the due date of the amount to be remitted it was overruled in Deputy Commissioner of Taxation v Woodhams[15].

The second ground of invalidity found in Gruber concerned misstatements in the notice. The relevant notice contained two errors in that respect. First, it misstated the amount of one of thirteen deductions set out in the table in the notice. Secondly, it included a statement that the "Total amount you are liable to pay by way of penalty" was "$582,662.81", whereas the total amount of the company's unpaid liability was only $453,487.08.

So far as is relevant here, Stein JA identified as the issues in Gruber the following questions:

"1.Whether separate notices can be given by the one composite document?

Whether the admittedly "invalid portions" of the first notice may be severed?

Were the notices in themselves (or with the accompanying letters misleading)?"

As to the first question Stein JA held that a notice may be a composite document separately including the amount of different months of unremitted group tax provided that it informed the recipient that it was a notice in respect of each obligation. The applicant does not take issue with that view.

As to the second question, Stein JA held that "neither of the admittedly erroneous portions of the first notice may be severed from the notice."[16] That is to say, his Honour held that it was not possible to sever from the notice either the error as to the amount of the company's unpaid liability for a particular month or the error in the total. However, Stein JA did not in that section of the judgment hold the notice to be invalid on that account. That topic was discussed under the third question, which was whether the notices were misleading. It is in this section of the reasons that the critical finding of invalidity is made. After considering the submission for the Commissioner, Stein JA said:[17]

“… The plain fact is, whatever information the appellant obtained from Mr Gruber, the figures in the appellant's notice were incorrect for September/October 1994 and the total of the penalties which the respondent was required to pay was also erroneous and liable to mislead.

While a notice does not have to be absolutely correct (and one can well imagine some de minimis mistakes) the notice must fulfil its statutory purpose. That purpose is not merely to give the recipient the opportunity to check the accuracy of the penalties sought to be imposed by the notice. Rather it is to accurately set forth the amount of the penalty the recipient is to pay within 14 days or be sued by the Commissioner for that civil penalty. It seems to me that to any recipient the amount of the liability for the penalty is the most important aspect of the notice. It needs to be correct. It was not. Rather it was some $130,000 in excess of what it should have been had the “total” been accurate. The plain fact is that the notice overstated the amount of the penalty.

I agree with Graham A-J that, bearing in mind that the Act may visit liability on persons who may only have been directors for part of a deduction period or became directors after the due date for payment, they had the right to know precisely what liability of the company is being visited personally upon them by way of penalty. The finding of Graham A-J that the first notice was invalid was correct. …”

It is, in my respectful opinion, clear that the fact that the notice overstated the "total" by some $130,000 influenced his Honour's conclusion that the notice was invalid. It was not necessary for his Honour to decide whether or not the notice would have been invalid had that misstatement not been included. That is, in substance, the question in this case. Unlike the notice in Gruber, the “composite notices” in issue here did not demand payment of the total of the separate liabilities if one of the statutory alternatives to personal liability was not adopted. In my opinion Gruber is distinguishable for that reason.

The respondent relied upon Deputy Commissioner of Taxation v McArdle[18] in which this Court held that the requirement of s 222AOE that the notice set out details of the unpaid amount was satisfied by the Commissioner providing those details (even if the details included errors) which, at the date the notice was given, had been notified by the company to the Commissioner in compliance or in purported compliance with s 22OAAOA. That decision is not of direct relevance here, where it is not suggested that the errors in DPN2 were contributed to by the company.

In Deputy Commissioner of Taxation v Woodhams the High Court analysed a problem concerning the validity of a notice under s 222AOE by identifying the legislative purpose served by such a notice and considering whether a failure to provide in the notice the necessary details had the consequence that the notice did not fulfil that purpose.[19] In relation to an argument that the notice was invalid because it was misleading, the court referred to Kleinwort Benson Australia Ltd v Crowl[20] in which it was said that a bankruptcy notice is a nullity if it fails to meet a requirement made essential by the legislation, or if it could reasonably mislead a debtor as to what is necessary to comply with a notice.

The court identified the relevant statutory purposes of the notice in the following passage:[21]

“The first purpose of the notice is to inform the recipient of the unpaid amount of the company’s liability under the remittance provisions, and of the recipient’s liability to a penalty in the same amount. The second purpose, consistently with s 222ANA, is to inform the recipient of the alternative courses available, as set out in s 222AOE(b), which will result in remission of the penalty, the object being to encourage the recipient to take such steps as are necessary to bring about the result that one or other of those courses is followed.”

In determining whether or not DPN2 fulfilled the statutory purposes or could reasonably mislead the director it should be borne in mind that each of the amounts set out in the table in that notice represented a separate and discrete liability. In Forsyth v Deputy Commissioner of Taxation[22], a director argued that a notice was invalid because it materially understated the amounts unpaid by the company at the time the notice was given in that it omitted reference to other taxation liabilities of the company. Spigelman CJ distinguished Gruber on the ground that it was concerned with actual mathematical errors on the face of the notice, whereas there was no "inaccuracy" in the notice in Forsyth. It accurately quantified the unpaid instalments for the months identified in it for which alone the notice asserted that the appellant would be liable to pay a penalty. As his Honour also pointed out, the company's statutory duty to pay arises anew each month with respect to the total of the deductions made in the previous month: "each such liability is discrete and can be the subject of a separate notice or, as in the present case, a notice for more than one month."[23]

DPN2 made it perfectly clear that each amount tabulated in it represented a separate liability of the company. Those amounts were included in a composite form only as a matter of convenience. The respondent might equally have issued a series of separate notices and served them upon the director at the same time. The applicant disavowed a contention that in such a case an error in any one such notice would invalidate the other notices. I do not see that the position is any different merely because, as a matter of convenience, what are in substance and effect a series of separate notices are combined in one composite notice that makes it clear that each liability asserted in it is separate and distinct from each other asserted liability.

Nor am I persuaded that the evidence establishes a fairly arguable case that there is any connection between the misstated liabilities of the company and the company’s different liabilities in relation to which judgment was obtained against the applicant. The evidence does not show that the misstatements in fact confused or misled the applicant in relation to the relevant items. The applicant did not identify any further evidence that he could adduce on that question or otherwise in relation to the validity of either notice.

I conclude that the notice DPN2 fulfilled the statutory purposes and was not misleading in relation to those liabilities asserted in it that were relevant to the respondent’s claim, despite the error or errors in other liabilities asserted in it.

That being so, my opinion is that upon the proper construction of s 222AOE of ITAA the misstatement or misstatements of asserted unpaid liabilities of the company in this form of director’s penalty notice did not invalidate that notice so far as it concerned the other, correctly stated unpaid liabilities of the company.

That conclusion also provides an alternative ground for rejecting the applicant’s contention that the other notice, DPN1, was invalid.

Disposition

In my opinion the applicant does not have a fairly arguable defence on the merits in relation to any part of the claim. For the reasons I have given I would make the following orders:

Grant the application for an extension of time within which to apply for leave to appeal limited to the grounds described in Order 2.

Grant leave to appeal limited to the grounds identified in the applicant’s draft notice of appeal as ground 1 (that the primary judge erred in law in not providing adequate reasons) and ground 6(b) (that the primary judge erred in law in not determining that the Director Penalty Notice issued to the applicant on 12 March 2003 was invalid or at least arguably so).

Dismiss the appeal.

That the applicant pay the respondent's costs of the applications and the appeal, to be assessed on the standard basis.

PHILIPPIDES J: I have had the advantage of reading the reasons for judgment of Fraser JA. I agree with the reasons of his Honour and with the proposed orders.

Litigation History

Appeal Status

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